The limit is triggered by the total amount both the employer and employee pay in premium irrespective of cost sharing arrangements. Federal bureaucrats also plan to include an employee's contributions to his Flexible Spending Account into those threshold tallies. Regulators also plan to include employer contributions toward HSAs or HRAs.
The Cadillac tax is applied across the nation uniformly despite significant premium differences among the states. Furthermore, the annual thresholds will only escalate at the rate of the Consumer Price Index as opposed to healthcare inflation which has been about three times that amount in the last fifteen years.
Hence, the number of plans taxed will increase rapidly over time. It is expected to extract $5 billion from the economy in 2018, then $34 billion by 2024 as more plans succumb to the tax's limits, according to the Congressional Budget Office.
The Wall Street Journal recently tackled the issue by discussing it with a few CFOs as well as reviewing transcripts of conference calls between company executives and investors. Here is an excerpt:
Waste-management company Action Environmental Group, based in Teaneck, N.J., could face a $400,000 bill from the government for triggering the tax, based on coverage it provides for 350 of its employees and their families.
“To me it’s a penalty for giving our employees a generous benefits package,” said Chief Financial Officer Brian Giambagno. ...
Action Environmental briefly considered doing away with employee health coverage altogether to save money. “I’d be lying if I said we haven’t had that discussion,” said Mr. Giambagno.
So far this year, executives of 13 publicly traded companies, including CVS Health Corp., have talked about the Cadillac tax in conference calls and investor presentations, compared with eight companies during all of 2014, according to a Wall Street Journal review of FactSet transcripts. Benefits providers such as Aetna Inc., Wageworks Inc.,Towers Watson TW -0.91% and CVS Health are among the companies that have discussed how the tax would affect overall business strategy.
“Employers will do what they need to do to stay under that threshold,” said Larry Merlo,chief executive of CVS Health, at an investor conference last week
According to a March survey of 562 human-resources and benefits officials representing U.S. companies, just 23% said they wouldn’t hit the excise threshold because their companies don’t have high-cost plans. A mere 2.5% said that they would pay the tax.
About 34% said in March that they were taking action or had taken action to avoid the levy. That compares to 24.5% of 624 respondents surveyed in 2014.
Businesses likely will shift to lower-cost insurance plans to avoid the levy, the CBO says. Some already are moving in that direction to stem health-care costs, which have risen by an average of 7% a year over the past 15 years, according to benefits consultant Mercer.
To avoid the tax, or lessen its bite, many companies intend to move to high-deductible health plans that require their employees to cover significantly more expenses out of pocket before insurance coverage kicks in. ...
The Cadillac tax could be changed, delayed or eliminated. Most congressional Republicans and many Democrats oppose it, and some presidential hopefuls have said they would do away with the whole health-care law.
CFOs, however, say they must plan for the Cadillac tax in its current form. Cisco Systems Inc. doesn’t want to trigger the tax based on the roughly 33,000 U.S. employees it covers. The networking-gear maker, based in San Jose, Calif., offers its workers a plan with a high deductible in addition to its standard plan, said CFO Kelly Kramer.
About 30% of workers switched to the high-deductible option, she said, and they received a stipend for their health-savings accounts to offset the larger deductibles. ...
I firmly believe this tax will be amended or repealed prior to 2018 when we will have a new President and almost entirely new congress. The tax was tremendously unpopular with unions when it was originally proposed during passage. Unions wanted it out of the law entirely.
However, the Administration knew that it needed the Cadillac tax in the law in order to accomplish two goals. First, the tax helps pay for the behemoth of PPACA. Overly rosy projections of the tax helped to keep PPACA's original price tag, myopically, under a trillion dollars. Second, it applies additional downward pressure on employers and insurers to keep premiums from skyrocketing - even if that means passing on greater co-pays, coinsurance and deductibles to plan enrollees.
The Administration also knew that it needed unions on its side, politically, to pass PPACA. The compromise was to keep the provision in the law but to kick it out to 2018, long after the implementation of the remainder of PPACA. This strategy means that a whole different set of politicians will have to deal with the political and economic fallout.
Nevertheless, the Cadillac Tax is the law at this moment in time. Hence, an employer has to start thinking about cheapening its plans and passing more cost onto employees via plan design in order to lessen the shock that could come in 2018 if this provision of the law is not significantly altered.
Mayor Bloomberg, for example, began that process in New York City before he left office in 2013. He pointed to this provision as a legitimate rationale to reign in rich and costly union employee benefits. Unions across the nation are now being warned that if they cannot figure out how to lessen health care costs, the effect of the tax will be steep, threatening raises and even jobs.
